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Gartmore woes highlight danger of over-reliance on stars

Gartmore has lost almost half its market value since announcing the suspension of a star fund manager...

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Published: 31 Mar 2010

Last Updated: 31 Aug 2010

Think you’ve had a bad week? Fund manager Gartmore saw its shares plummet nearly 45% yesterday – wiping the best part of £200m off its value – after revealing that it’s suspended Guillaume Rambourg, one of its star fund managers. The worry seems to be that if Rambourg is found to have done whatever they think he might have done, investors might rush to pull all their money out of Gartmore’s two biggest hedge funds, hammering its profits. Ok, so this is partly because the City is hyper-sensitive at the moment, given the FSA’s recent crackdown on insider trading. But it highlights the commercial risk of a company becoming too heavily reliant on key individuals...

Gartmore put out a fairly cryptic statement yesterday admitting that after consultation with the FSA, it had decided to suspend Rambourg ‘pending the outcome of an internal investigation in relation to breaches of internal procedures regarding directing trades.’ We have absolutely no idea what this means, and from what we can gather, nobody else is really sure either (the best guess seems to be that it’s something to do with the brokers Gartmore is allowed to use). But the fund manager was already the subject of febrile City speculation about its possible links to that FSA probe – so although Gartmore explicitly denied any link between the two stories, it’s no wonder its share price took such a beating. The result is that it’s trading well below its December float price, leaving it wide open for a takeover bid. (It's vital for the top brass to maintain a bit of perspective, and not get too obsessed by the share price.)

As a business, fund management is presumably more vulnerable to this kind of problem than most (as it is to investigations like this – one man’s insider information is another man’s informed tip-off, as Gordon Gekko will tell you). Rambourg isn’t even Gartmore’s biggest star – he’s number two to their top dog Roger Guy – but for many investors, the people at the helm is the reason they put their money in a fund. Market-beating fund managers are at a premium, so the money tends to be more loyal to them than their parent company – leaving their employer rather exposed. (Although we suppose the converse, i.e. having no stars at all, is probably not ideal either).

But in practice, any business that relies heavily on a couple of individuals is similarly vulnerable (they’d never sell any key man insurance otherwise). Equally, for any company, investigations like these are unlikely to have a happy ending. They’ll almost certainly harm the individual or the firm’s reputation, and in a worst case scenario, they could result directly in a loss of business. About the best you can hope for is that they just waste a lot of management time...